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Improper Use of the Indemnification Clause

Many declarations contain a clause that requires the owners to indemnify the corporation for a loss, cost, damage or injury to the common elements or units if it was caused by the owner, his family, tenants, guests etc. Many condominiums attempt to apply these clauses to other types of expenses incurred by the condominium, such as legal costs.

A few years ago Justice Smith of the Superior Court heard a case where a condominium registered a lien against an owner’s unit for legal costs incurred by the condominium in relation to three Small Claims Court actions commenced by the owner against the condominium. The actions were dismissed without costs being awarded to the condominium. The condominium registered a lien against the owner’s unit to recover its legal costs and relied upon Articles XIX and XXIII of the Declaration, which stated:

Article XIX: Each residential owner shall indemnify the Corporation against any loss, cost, damages or injury to the common elements caused by or resulting from any act or omission of such residential owner or the residents of his unit…

Article XXIII: All costs, charges and expenses and all solicitors’ charges (as between a solicitor and his client) which may be incurred by the Corporation in taking any action, including summary proceedings, against an owner shall immediately become due and payable by such owner and may be added to and recovered in the same manner as recovery in the case of an owners default in his obligations to contribute towards the common expenses of the Corporation.

The court found that Article XIX was not applicable as obtaining legal advice because of the actions of the owner did not constitute a loss or damage to the common elements. Article XXIII did not apply either because the condominium had not taken any action against the owner. It had obtained legal advice to defend the actions started by the owner. The court ordered the condominium to discharge the lien against the owner’s unit and pay $5,000.00 in costs to the owner.

In June of 2016 leave to appeal a decision of the Small Claims Court was granted because a judge relied upon a clause like Article XIX above as proper authority for a condominium to charge legal fees back to an owner. This is only a decision on the motion for leave to appeal, but I would be surprised if the owner was unsuccessful on appeal given previous decisions of the courts.

So what is my point? Simply that a condominium cannot force an owner to indemnify it for costs incurred without proper authority to do so. Authority may be contained within the Act (see e.g. sections 92(4), 98 (4), or 134(5)), declaration (e.g. like above), or by-law (e.g. insurance deductible). The condominium’s lawyer can assist in determining if there is proper authority in the Act or documents or if there are other legal principles that may allow the condominium to recover the expense from the owner.

How is this going to change with the amendments to the Act? Well it appears that the Act and regulations will limit the ability of a condominium to charge costs back to owners unless expressly permitted by the Act (perhaps via a list in the regulations) or the declaration. In other words, chargebacks based upon provisions in the by-laws or rules may be expressly prohibited.